I agree with the article's #1 recommendation: education. Most people are literally clueless when it comes to personal finance. And to compound the problem, money is still a taboo topic for many, making it very difficult to educate people on the topic. I've personally found it very frustrating to convince people of even the need for retirement savings, let alone the specifics of how to do it.

If we could just convince people to save at least 15% of their gross income into a target-date fund, I think that 80% or more of the 'retirement crisis' would be averted.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

I do agree with education, but you can have all the education in the world, but it won't give you the discipline to spend less than you earn, which is really the biggest problem. We can educate people how to lose weight, but discipline is what gets you there.

While I am not sure if "Retirement is Broken" or if the solutions mentioned are the right ones, I do second the importance of education. Unfortunately, it is the basics that I find most important, not necessarily "personal finance" education.

We have huge portions of the adult population that cannot read beyond an elementary school grade level. Additionally, I recently met a recent a college student complaining that he was struggling to pass Algebra. I felt worried that if our college students were in this state, the rest of the population must really be struggling.

If you can't read and you can't understand Algebra and basic math, I doubt you will ever truly understand personal finance even if it is added to high school curriculums. I am not a huge charity donor but I regularly give to literacy orgs and encourage others to do so as well.

The article is mostly okay, but I strongly disagree that the problem is a shift from income to assets, (and I suspect Merton is plugging his financial services). After all you can convert between assets and income.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

It's fine for groups of people to pool their assets and produce income streams while reducing individual risk. But they should make do with the assets they have and not expect subsidies.

IIRC, Merton has been pushing this idea of instruments that provide a guaranteed lifetime income for some time and that can be bought a little bit at a time like 401(k) monthly / bi-monthly contributions. Don't recall much additional discussion on it and I haven't seen much head way on implementing that concept.

FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The calvary isn't coming, kids. You are on your own.

IIRC, Merton has been pushing this idea of instruments that provide a guaranteed lifetime income for some time

That "some time" better be equal to "all the years you still get to live", otherwise the income wouldn't be "lifetime".
Anyway, your description sounds similar to this thing I once read about in a sci-fi book. There was this far-away planet, where a highly socially developed society lived, that had invented something called "apension", not sure I remember its name correctly. It sounds kind of what you (and Prof. Merton) describe: people contribute periodically during their work life in exchange of a permanent income flow when they retire. Crazy, if you ask me...

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed.
...
It's fine for groups of people to pool their assets and produce income streams while reducing individual risk. But they should make do with the assets they have and not expect subsidies.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

Tough talk, but have you considered the cost of the social safety net that would be needed after you declare pensions invalid, thereby throwing many current pensioners into poverty?

What does it mean "overpromised" ?
Why it is so difficult to account for deferred compensation ? Pensions don't necessarily have to be funded by contributions. If an employer offers a 150k/yr. salary, nobody bats an eye, but if they offer 100k/yr. plus 5k/yr. per year of service starting at age 65, suddenly some people feel the enemy is at the gate.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

Tough talk, but have you considered the cost of the social safety net that would be needed after you declare pensions invalid, thereby throwing many current pensioners into poverty?

Current pension benefits vested would remain, it would be future unearned benefits that would be eliminated. Essentially pensions would be frozen with no more accrual of benefits. Instead, a known and current value would be deposited today in an account, the future value of which is not guaranteed or shouldered by others who bear the risks. The account holder bears the risks - that is what a defined contribution plan offers.

What does it mean "overpromised" ?
Why it is so difficult to account for deferred compensation ? Pensions don't necessarily have to be funded by contributions. If an employer offers a 150k/yr. salary, nobody bats an eye, but if they offer 100k/yr. plus 5k/yr. per year of service starting at age 65, suddenly some people feel the enemy is at the gate.

The issue is the volatility of returns. How can you issue a promise to pay X when you can’t account for sequence of risk? What is the formula for that? Bankruptcy to make good on a promise with unlimited cost?

Tough talk, but have you considered the cost of the social safety net that would be needed after you declare pensions invalid, thereby throwing many current pensioners into poverty?

Declaring that guaranteed pensions are invalid wouldn't make the money that's in them disappear. It's just the guarantee that should be made invalid. The actual benefits should be proportionally adjusted based on actual performance, instead of expecting taxpayers (or future contributors who pay more for less benefits) to backstop them. I wish we could hold individuals who made generous guarantees with other people's money personally responsible, but I won't say any more to avoid getting into politics.

The issue is the volatility of returns. How can you issue a promise to pay X when you can’t account for sequence of risk? What is the formula for that? Bankruptcy to make good on a promise with unlimited cost?

The simple answer is that annuity companies manage to do precisely that, and while making a living for themselves at the same time. Can't you imagine a very large annuity company operating at cost and with the lowest risk of default ? If you can't here's a hint: its "CEO" is elected every 4 years.

The article is mostly okay, but I strongly disagree that the problem is a shift from income to assets, (and I suspect Merton is plugging his financial services). After all you can convert between assets and income.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

It's fine for groups of people to pool their assets and produce income streams while reducing individual risk. But they should make do with the assets they have and not expect subsidies.

Very good post. It resonates with my thinking. Pensions are a good thing but they were overpromised, particularly in the public sector. I think New Jersey is 30% funded, horrible. My own state is 80% funded and the funding gap has created some big problems in my state, can't imagine what they are experiencing in New Jersey.

The thing is, how can the retirement system be broken when it was never fixed in the first place. Even in the "good old days" of more abundant pensions, many people still didn't have one, or if they had one, didn't have enough years of service for it to be of meaningful size in retirement. So the good old days never really were. Retirement as we know it today is a relatively recent phenomenon. In my Grandparents day, when you got too old to work and couldn't maintain your own household, you moved in with your kids.

Definitely, there are improvements to be made. Not arguing that all is hopeless so that we shouldn't even try. But I do think that the retirement model of everyone being 401k millionaires with oodles of long term care insurance just is not realistic. Maybe $200,000 in a 401k and a paid off house upon retirement is the best many folks can do particularly after putting their kids through college.

Lots of folks here will be really disappointed if they retire with "only" $500,000 in retirement accounts upon retirement. I think societal expectations are unrealistic, we are trying to sustain what our parents and grandparents could not. My own parents got part way there and were fortunate to receive a couple of inheritances. They did okay.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

Tough talk, but have you considered the cost of the social safety net that would be needed after you declare pensions invalid, thereby throwing many current pensioners into poverty?

You would have to decide who gets paid what from the available funds, e.g. the $20k pension gets fully paid, while the $200k pension gets a haircut. (Also look back and claw back any windfalls from shenanigans such as temporarily boosting incomes opportunistically for short times so as to boost pension payout. These activities should not be rewarded.) Even if pensions are 30% funded (actually 233% overpromised) just make do with the available funds and don't confiscate the hard earned funds from third parties.

All of these problems stem from the idea that you could promise guaranteed income decades into the future. It absolutely cannot work.

What does it mean "overpromised" ?
Why it is so difficult to account for deferred compensation ? Pensions don't necessarily have to be funded by contributions. If an employer offers a 150k/yr. salary, nobody bats an eye, but if they offer 100k/yr. plus 5k/yr. per year of service starting at age 65, suddenly some people feel the enemy is at the gate.

I dont want my employer or the government holding money for me, thank you. I prefer to deposit to my low cost index fund portfolio and decide for myself how much and when to invest. People have a tendancy to find ways to “rob” a large pool of money. Yes, enemy at the gate is true.

Where does that 15% saving figure comes from ? Certainly, it can be correct independently of one's salary and retirement expenses...

Nothing wrong with using a percentage of your earnings, irregardless of salary level, especially for a rule of thumb.

Someone making $1M and saving 15% spends the same 85% as someone making $50K and saving 15%. Lifestyle now is going to dictate retirement expenses relatively proportionally.

For Bogleheads, rules of thumbs like 'save at least 15% of your gross income' are unnecessary because they understand the nuances and issues at work. But the average person is clueless about such nuance and has virtually zero interest in learning it. So we develop rules of thumb that are likely to be far better than nothing. Keep in mind that the average American is saving about 6% of their gross income. Telling them to save at least 2.5X that much is far more likely to help them than to hurt them.

Assuming 5% real returns and 4% withdrawals, a 15% savings rate leads to financial independence in about 43 years. So if a person did that over the course of their career, they'd have a pretty high likelihood of being alright, especially when you add in Social Security.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

I'm not so sure. Financial education seems to me to be a necessary but insufficient condition for a strong likelihood of a comfortable retirement these days, apart from one receiving one of the few lucrative pensions still out there.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

The issue is the volatility of returns. How can you issue a promise to pay X when you can’t account for sequence of risk? What is the formula for that? Bankruptcy to make good on a promise with unlimited cost?

The simple answer is that annuity companies manage to do precisely that, and while making a living for themselves at the same time. Can't you imagine a very large annuity company operating at cost and with the lowest risk of default ? If you can't here's a hint: its "CEO" is elected every 4 years.

The same annuity company whose trustees have issued report after report indicating if no action is taken a very real cut in benefits would occur in 2034? And you really believe that a projected cut in benefits is not a default?

The article mentions that "only" 16% of high school students are required to take a personal finance class in high school. Where are the results of this massive increase (from 0%) of students taking personal finance classes? Does any Boglehead look around and go "all that education I was calling for has really paid off! Retirement planning is 16% more on track as a country; consumer debt is 16% better; it may not be 100% better but 16% better is a massive improvement!"

Or....has there actually been no real world impact on that massive increase in personal finance education over the past 20 years?

The answer is that it is trivial to look at actual research on personal finance education and see that it has little to no real world impact.

No significant relationship between taking a high school course and investment knowledge was found

"Thus far, the empirical work doesn't show much of an effect [from financial literacy courses]," says Lauren Willis, professor at Loyola Law School in Los Angeles. "Some findings are that there are negative effects sometimes, presumably because of overconfidence."

a 2014 paper from three professors looked at the results from nearly 170 papers covering more than 200 scientific studies on financial literacy and found that financial education did little to improve subsequent financial behaviors.

Another recent meta-study found that "financial education has a positive, measurable, impact on financial behavior with an effect size of 0.09". If you think an effect size that small is going to save national retirement for an entire generation, you are kidding yourself.

But by all means, ignore the research and keep pretending that education is the answer.

When you look at the countries at the top of the Mercer Global Pension Index it isn't the ones with the best personal finance education.

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

willthrill81,

What is the point of discussing how much to save when they cannot save any amount in the first place? In my neighborhood of annual median household income of 150K, for many people, the only "saving" is in the home equity.

The article is mostly okay, but I strongly disagree that the problem is a shift from income to assets, (and I suspect Merton is plugging his financial services). After all you can convert between assets and income.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

It's fine for groups of people to pool their assets and produce income streams while reducing individual risk. But they should make do with the assets they have and not expect subsidies.

Do the same arguments apply to Social Security? Just asking as a teacher who pays into their pension and whose taxes also go into Social Security.

Social Security is not a pension plan, it is insurance. The full name is Old Age Survivor Disability Insurance -“OASDI”. It was designed to provide a minimum level of benefits to prevent abject poverty, but it is not or ever intended to replace a pension or a savings plan. It offers disability insurance along with death benefits for survivors (widow/minor children). Your tax payment is really an insurance premium payment.

It’s sort of astonishing how little people really know about a program that has been in existence since the early 1930’s. My own grandparents referred to Social Security as the “monthly pension”.

Last edited by Grt2bOutdoors on Thu Dec 06, 2018 7:54 pm, edited 1 time in total.

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

willthrill81,

What is the point of discussing how much to save when they cannot save any amount in the first place? In my neighborhood of annual median household income of 150K, for many people, the only "saving" is in the home equity.

KlangFool

Home equity is hardly savings in a depreciating asset. If you fail to maintain the home, what you think you are saving is being depleted in the form of deferred maintenance that will affect sale price.

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

They need less than that, the figures you cite above are based on Benegen’s 4% with continuity of the corpus. In reality, a portfolio of roughly $800k in a series of SPIA’s could provide slightly higher than $40k without Social Security. The real issue is that most people are not retiring with $800k in assets after a lifetime of work, expecting one to do so in 15 years requires an extraordinary effort and a lot of luck. It can be done but requires all the pieces to fall into place with no disruption- health, employment, asset placement, no catastrophic anything.

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

willthrill81,

What is the point of discussing how much to save when they cannot save any amount in the first place? In my neighborhood of annual median household income of 150K, for many people, the only "saving" is in the home equity.

KlangFool

Home equity is hardly savings in a depreciating asset. If you fail to maintain the home, what you think you are saving is being depleted in the form of deferred maintenance that will affect sale price.

Grt2bOutdoors,

The problem is deeper than that. Many folks are living paycheck to paycheck with zero emergency fund. So, why talk about retirement saving when many folks will not survive in the next recession?

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

willthrill81,

What is the point of discussing how much to save when they cannot save any amount in the first place? In my neighborhood of annual median household income of 150K, for many people, the only "saving" is in the home equity.

KlangFool

They need to know how much they need to save before they can determine how much they can spend now. Several places in the U.S. all but require that the people who live there sacrifice their financial future in order to do so.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

They need less than that, the figures you cite above are based on Benegen’s 4% with continuity of the corpus. In reality, a portfolio of roughly $800k in a series of SPIA’s could provide slightly higher than $40k without Social Security. The real issue is that most people are not retiring with $800k in assets after a lifetime of work, expecting one to do so in 15 years requires an extraordinary effort and a lot of luck. It can be done but requires all the pieces to fall into place with no disruption- health, employment, asset placement, no catastrophic anything.

I was merely offering an example, not a recommendation, to illustrate how truly little the typical person knows about personal finance.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Where does that 15% saving figure comes from ? Certainly, it can be correct independently of one's salary and retirement expenses...

Nothing wrong with using a percentage of your earnings, irregardless of salary level, especially for a rule of thumb.

Someone making $1M and saving 15% spends the same 85% as someone making $50K and saving 15%. Lifestyle now is going to dictate retirement expenses relatively proportionally.

Assuming 5% real returns and 4% withdrawals, a 15% savings rate leads to financial independence in about 43 years. So if a person did that over the course of their career, they'd have a pretty high likelihood of being alright, especially when you add in Social Security.

First, not everyone is going to be working 43 years in a continuous fashion, there very well be breaks in employment following an economic lifecycle. Second, while my real return last year exceeded 5%, this year its negative. One can not expect straight-line returns in a linear fashion. The average saver lacks the behavioral fortitude to stay the course during market upheavals. A target date fund or a fund with a mandate to rebalance such as a traditional balanced fund may be the better options if they were the only choices offered in a defined plan, if only to prevent one from being able to shoot themselves in the foot. Most folks are not going to go or need to go to the level of detail we do on this forum. One fund and that’s it.

Do a few things right, and the rest will fall into place. The biggest problem is inertia, thinking that problems will solve themselves or someone else offers the holy grail in investing (queue in the various financial advisory firms).

Where does that 15% saving figure comes from ? Certainly, it can be correct independently of one's salary and retirement expenses...

Nothing wrong with using a percentage of your earnings, irregardless of salary level, especially for a rule of thumb.

Someone making $1M and saving 15% spends the same 85% as someone making $50K and saving 15%. Lifestyle now is going to dictate retirement expenses relatively proportionally.

Assuming 5% real returns and 4% withdrawals, a 15% savings rate leads to financial independence in about 43 years. So if a person did that over the course of their career, they'd have a pretty high likelihood of being alright, especially when you add in Social Security.

First, not everyone is going to be working 43 years in a continuous fashion, there very well be breaks in employment following an economic lifecycle. Second, while my real return last year exceeded 5%, this year its negative. One can not expect straight-line returns in a linear fashion. The average saver lacks the behavioral fortitude to stay the course during market upheavals. A target date fund or a fund with a mandate to rebalance such as a traditional balanced fund may be the better options if they were the only choices offered in a defined plan if only to prevent one from being able to shot themselves in the foot. Most folks are not going to go or need to go to the level of detail we do on this forum. One fund and that’s it.

Do a few things right, and the rest will fall into place. The biggest problem is inertia, thinking that problems will solve themselves or someone else offers the holy grail in investing (queue in the various financial advisory firms).

I agree. But people need to know what 'the few things' are. A decent savings rate is prerequisite to everything else. Decent investments are the other. As Rob Berger of the Doughroller Money podcast says, 'Make more. Spend less. Invest the rest.'

For someone (not you) to say that financial education is unimportant is...puzzling, to say the least.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

They need less than that, the figures you cite above are based on Benegen’s 4% with continuity of the corpus. In reality, a portfolio of roughly $800k in a series of SPIA’s could provide slightly higher than $40k without Social Security. The real issue is that most people are not retiring with $800k in assets after a lifetime of work, expecting one to do so in 15 years requires an extraordinary effort and a lot of luck. It can be done but requires all the pieces to fall into place with no disruption- health, employment, asset placement, no catastrophic anything.

I was merely offering an example, not a recommendation, to illustrate how truly little the typical person knows about personal finance.

I know. I believe you too. I was just trying to show other readers that there are ways to finance a retirement but it requires early and consistent planning.

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

They need less than that, the figures you cite above are based on Benegen’s 4% with continuity of the corpus. In reality, a portfolio of roughly $800k in a series of SPIA’s could provide slightly higher than $40k without Social Security. The real issue is that most people are not retiring with $800k in assets after a lifetime of work, expecting one to do so in 15 years requires an extraordinary effort and a lot of luck. It can be done but requires all the pieces to fall into place with no disruption- health, employment, asset placement, no catastrophic anything.

I was merely offering an example, not a recommendation, to illustrate how truly little the typical person knows about personal finance.

I know. I believe you too. I was just trying to show other readers that there are ways to finance a retirement but it requires early and consistent planning.

The only semi-reasonable alternative I'm aware of these days (apart from getting a good pension working for the Federal government) is the real estate route, but that requires even more education and effort than the 'asset driven model' that we focus on in this forum. It can also involve a lot more risk.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

willthrill81,

What is the point of discussing how much to save when they cannot save any amount in the first place? In my neighborhood of annual median household income of 150K, for many people, the only "saving" is in the home equity.

KlangFool

They need to know how much they need to save before they can determine how much they can spend now. Several places in the U.S. all but require that the people who live there sacrifice their financial future in order to do so.

willthrill81,

They cannot save. They need and want to spend now in order to maintain their lifestyle. They have zero emergency fund. So, why would they care to know how much they need to save?

This is the philosophical difference between.

A) Spend first and save later

versus

B) Save first and spend later.

For people in the group (A), it usually took a recession and almost total financial disaster before they will change and listen. This is for the lucky few that did survive from the disaster. For others, there was no recovery.

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

willthrill81,

What is the point of discussing how much to save when they cannot save any amount in the first place? In my neighborhood of annual median household income of 150K, for many people, the only "saving" is in the home equity.

KlangFool

They need to know how much they need to save before they can determine how much they can spend now. Several places in the U.S. all but require that the people who live there sacrifice their financial future in order to do so.

willthrill81,

They cannot save. They need and want to spend now in order to maintain their lifestyle. They have zero emergency fund. So, why would they care to know how much they need to save?

This is the philosophical difference between.

A) Spend first and save later

versus

B) Save first and spend later.

For people in the group (A), it usually took a recession and almost total financial disaster before they will change and listen. This is for the lucky few that did survive from the disaster. For others, there was no recovery.

KlangFool

Anyone earning more than a living wage can save. The question then becomes is whether they want to. Many are indeed making the choice you refer to: spending now and hoping that they will save later. But as I said, most of these people have no clue how much they will need to save in order to produce the lifestyle they will want later in life (e.g. retirement).

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

willthrill81,

What is the point of discussing how much to save when they cannot save any amount in the first place? In my neighborhood of annual median household income of 150K, for many people, the only "saving" is in the home equity.

KlangFool

Home equity is hardly savings in a depreciating asset. If you fail to maintain the home, what you think you are saving is being depleted in the form of deferred maintenance that will affect sale price.

Grt2bOutdoors,

The problem is deeper than that. Many folks are living paycheck to paycheck with zero emergency fund. So, why talk about retirement saving when many folks will not survive in the next recession?

KlangFool

Because you can not use broad strokes and say the majority of people fall into that category. Are there folks who in that bucket - yes. Are there people who do not fall into that category - yes. But even those who are enduring it today or in the immediate future have a shot of getting out from under. Financial education is important because you learn how to use the tools which could get you ahead in the future. Retirement is not just for those who aren’t affected, it’s for everyone and it’s coming at some point down the road.

The article is mostly okay, but I strongly disagree that the problem is a shift from income to assets, (and I suspect Merton is plugging his financial services). After all you can convert between assets and income.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

It's fine for groups of people to pool their assets and produce income streams while reducing individual risk. But they should make do with the assets they have and not expect subsidies.

I don’t k ow how to make heads or tails of this post. Who is working extra to pay for someone else’s pension?

Knowing and doing are totally different. People know that they should save money. But, they are not willing to compromise on their current lifestyle in order to save.

The typical person does not know that they need a $1 million portfolio to provide $40k of income for 30 years (more or less). They also do not know the math involved in building that $1 million portfolio. Most people think that they can start saving for retirement in their 50s and be good-to-go by 65.

Yes, they know that they need to save, but they do not how much, for how long, and to what end.

willthrill81,

What is the point of discussing how much to save when they cannot save any amount in the first place? In my neighborhood of annual median household income of 150K, for many people, the only "saving" is in the home equity.

KlangFool

They need to know how much they need to save before they can determine how much they can spend now. Several places in the U.S. all but require that the people who live there sacrifice their financial future in order to do so.

willthrill81,

They cannot save. They need and want to spend now in order to maintain their lifestyle. They have zero emergency fund. So, why would they care to know how much they need to save?

This is the philosophical difference between.

A) Spend first and save later

versus

B) Save first and spend later.

For people in the group (A), it usually took a recession and almost total financial disaster before they will change and listen. This is for the lucky few that did survive from the disaster. For others, there was no recovery.

The article is mostly okay, but I strongly disagree that the problem is a shift from income to assets, (and I suspect Merton is plugging his financial services). After all you can convert between assets and income.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

It's fine for groups of people to pool their assets and produce income streams while reducing individual risk. But they should make do with the assets they have and not expect subsidies.

I don’t k ow how to make heads or tails of this post. Who is working extra to pay for someone else’s pension?

The problem is that many (most?) pensions were underfunded due to overly optimistic return projections by those running them. The only solutions are to (1) reduce benefits, which may not be feasible, (2) increase current contributions, or (3) both.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

The issue is the volatility of returns. How can you issue a promise to pay X when you can’t account for sequence of risk? What is the formula for that? Bankruptcy to make good on a promise with unlimited cost?

The simple answer is that annuity companies manage to do precisely that, and while making a living for themselves at the same time. Can't you imagine a very large annuity company operating at cost and with the lowest risk of default ? If you can't here's a hint: its "CEO" is elected every 4 years.

Sure and annuities do it by having crappy returns. Pensions work with ~8% assumed returns. Annuities returns are long bonds(3-4%) level. That makes a tremendous difference in the amount that needs to be saved.

Could you run a pension plan that didnt have a way for make ups(larger employer contributions) backed up by some insurance product? Maybe. But I have a feeling those insurance rates would be pretty high(2%/year?).

Where does that 15% saving figure comes from ? Certainly, it can be correct independently of one's salary and retirement expenses...

Nothing wrong with using a percentage of your earnings, irregardless of salary level, especially for a rule of thumb.

Someone making $1M and saving 15% spends the same 85% as someone making $50K and saving 15%. Lifestyle now is going to dictate retirement expenses relatively proportionally.

Assuming 5% real returns and 4% withdrawals, a 15% savings rate leads to financial independence in about 43 years. So if a person did that over the course of their career, they'd have a pretty high likelihood of being alright, especially when you add in Social Security.

First, not everyone is going to be working 43 years in a continuous fashion, there very well be breaks in employment following an economic lifecycle. Second, while my real return last year exceeded 5%, this year its negative. One can not expect straight-line returns in a linear fashion. The average saver lacks the behavioral fortitude to stay the course during market upheavals. A target date fund or a fund with a mandate to rebalance such as a traditional balanced fund may be the better options if they were the only choices offered in a defined plan, if only to prevent one from being able to shoot themselves in the foot. Most folks are not going to go or need to go to the level of detail we do on this forum. One fund and that’s it.

Do a few things right, and the rest will fall into place. The biggest problem is inertia, thinking that problems will solve themselves or someone else offers the holy grail in investing (queue in the various financial advisory firms).

This is an interesting thought, but my experience is quite different. The VAST majority of people I know do absolutely nothing to their 401K during market rising or falling. They simply lack the knowledge to even know what to do. They let it ride. I think that’s what most people do.

The article is mostly okay, but I strongly disagree that the problem is a shift from income to assets, (and I suspect Merton is plugging his financial services). After all you can convert between assets and income.

The real problems with pensions in their current form, and the reason they should really be abolished, is that are massively overpromised and are guaranteed. There's no serious plan to fulfill the overgenerous promises, so it falls on other employees and the general tax base to supply the overpromised and guaranteed income. It's not fair that those who don't have these lavish pensions should have to work an extra 5 or 10 years to fund the pensions of those that do have them. The changes that need to be made (short of outright abolition), is that as a society we should say that the pension promises were never valid in the first place, and there should never be guarantees made about income decades in the future. Instead, the payouts should be made from the available funds without any subsidies from the public.

It's fine for groups of people to pool their assets and produce income streams while reducing individual risk. But they should make do with the assets they have and not expect subsidies.

I don’t k ow how to make heads or tails of this post. Who is working extra to pay for someone else’s pension?

The problem is that many (most?) pensions were underfunded due to overly optimistic return projections by those running them. The only solutions are to (1) reduce benefits, which may not be feasible, (2) increase current contributions, or (3) both.

Public pensions are underfunded because of this. Most private are not.